Restaurants, Luxury Tenants are Once Again in Expansion Mode

The retail real estate market is finally reaching a state of equilibrium, with several groups of tenants working on aggressive expansion campaigns, according to leasing executives attending the RECon convention in Las Vegas this week. Leasing activity has gotten strong enough that there is now talk of new developments under works for 2014/2015. The caveat is that those trends are much more pronounced in top-tier, urban markets, including Seattle, Dallas and Miami, than they are in smaller areas.

Restaurants, retailers that focus on aspirational luxury items and apparel sellers have been among the most active dealmakers at high-end properties in the New York area, according to Francis X. Scire, Jr., assistant vice president of leasing with mall REIT Simon Property Group. Simon is currently working on expansion/redevelopment projects at Walt Whitman Shops in Huntington Station, N.Y. and Roosevelt Field Mall in Garden City, N.Y. At Walt Whitman Shops, where Simon is adding 70,000 sq. ft. of front-line GLA to the center, that space will be filled by P.F. Chang’s and Brio Tuscan Grille on the restaurant side and Urban Outfitters concepts, West Elm and Pottery Barn Kids, among others, on the retailer side.

Retailers “are still very focused on making sure the decision [to go into a center] will work for them, but they want to open stores. It feels good again,” says Scire.

Some of the same tenants that have been signing new leases or expansion deals at Simon’s malls in New York, including Tesla Motors, Microsoft and Apple, have also been filling up space at The Bellevue Collection, a class-A property in Bellevue, Wash., according to Kemper Freeman, Jr., chairman and CEO of Kemper Development Co., which owns the center. With the vacancy rate at the Bellevue Square mall now at less than 2 percent, Kemper Development feels confident enough in the market to start work on a major expansion that will include 400,000 sq. ft. of retail, 600,000 sq. ft. of office space, residential units, a hotel and 3,000 parking stalls.

Kemper executives first started thinking about the expansion four years ago, but it was put on hold because of the recession. In the last six months, however, the company witnessed a 38.5 percent average increase in same-store sales, according to Freeman.

“Entertainment and restaurants are doing well,” he says. “And the luxury component is really on fire in our market.”

Freeman cautions, however, that The Bellevue Collection benefits from its location in a market that serves as home to a lot of major technology firms, including Microsoft, Expedia and Amazon. Median family income in Bellevue is roughly $100,419 a year, which helps drive sales at retail and restaurant establishments.

The same is true in Dallas, where the energy boom has been driving population growth, and consequently demand for more retail, according to Mike Geisler, founding partner with Venture Commercial, a regional real estate services firm. Geisler notes that Texans, normally content to live in the suburbs, have been gravitating toward Dallas’ urban core, and that’s where many retailers want to do deals. Among the most rapidly expanding tenant groups are restaurants (particularly the burger concepts) and grocery stores, including Whole Foods, Kroger, Fresh Market, Sprouts and Walmart Neighborhood Market.

“The tenants are fighting for the right spaces—if they like the space, they’ll take deals with no Tenant Improvement (TI) dollars and will get creative in other ways,” Geisler says. “So we’re starting to see some higher rents.”

Restaurants, for example, will now pay anywhere from $65 to $70 per sq. ft. for space in downtown Dallas.

Conditions don’t appear as rosy for retail properties in many secondary and tertiary markets, however. During the boom, for example, there were some shopping centers built in markets like Atlanta that will never going to work as retail, according to Scott Prigge, senior vice president of national property operations with Regency Centers, which is headquartered in the area. Prigge notes that the centers will likely be bought and redeveloped to fit another use, but when it comes to Regency, the shopping center REIT is now focusing on top-tier urban infill markets, preferably with at least 100,000 people within a three-mile radius and average annual incomes in the $100,000 range.

“We feel our anchors will perform better in those locations, and by extension, so will the inline tenants,” Prigge notes.